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Once an individual understands the needs for financial planning, he further defines the purpose or the goal he needs to achieve. Broadly, the goals can be differentiated on the basis of time-horizon:

1)Long term goals

2)Short term goals

Long term goals are those requirements in life, which an individual perceives at-least a decade ahead from the time he starts looking towards attaining that goal. Your retirement planning and child’s future planning are some major long term goals which an individual foresees decades before.

Short term goals unlike, are goals that one foresees immediately or in the near future. Goals like buying a house, buying the new Car or even planning for a holiday abroad are part of the short term goals. In time horizon terms, the short term goals are varying between 3 to 5 years.

Too often, financial planning is made out to be simpler than it is. Of course, at a level financial planning is relatively uncomplicated, but that does not mean that it is the only about identifying investment objectives and out longing an investment plan that will help you get there where you want to. It does involve both these elements of course, but there is an equally importance of element that is often ignored which is called asset allocation.

What is asset allocation?

Asset Allocation is a simple tool which helps individuals analyze their current conditions of assets. Primarily, assets constitute of five elements:

1)Equity

2)Debt

3)Property

4)Gold

5)Cash

With the understanding of the asset allocation, an individual is able to identify the present status or the present condition of how his assets are placed or how they are faired vis-à-vis his goals that he want to achieve. Asset allocation is a tool which determines the percentage of your investments to be held in elements of assets.

Now asset allocation may sound you like a complicated concept, but that isn’t, if understood well. As the word suggests, it means distributing your money across various investment avenues or assets, so that the poor performance of any one asset or avenue does not jeopardize or does not malfunction the entire investment plan.

To better appreciate how the right asset allocation can add value to one’s investment plan, let us first understand what it is all about in detail. When you look at the investments, there are lots of assets. Assets which I recently just talked about. As an investor, you really don’t know which asset must form part of your investment plan and if it must, how much of it should you own. To the first query which asset must you own, most investors own all the assets, like your equity, debt, property, gold and cash. The answer to the second question how much of these assets should you own, is a little tricky one. Because it will vary from investors to investors. Depending upon the investors reasons to invest.

An honest and a competent financial planner will certainly play an important role in keeping you determining how much of the assets of each asset class must contribute your investment plan. Although there is no thumb-rule that would determine on a certain age how much of your assets should be allocated or in percentage terms that would achieve your X Y Z …. Goals.

Asset allocation is a very personalized and a very client related concept. There could be different asset allocation for different individuals bearing the same age but having different decided dreams or goals in mind. Hence, asset allocations is a subject of more a private affair of any client and is not a rule that can be stated for a particular age and life style to achieve the goal, and is to be dealt with every individual differently.

A place for every Asset:

To be sure every asset has a role to play in your financial plan portfolio equally important is the allocation features it puts. An investor, who can take a risk will appreciate that he must include equities in his portfolio but that is just half the story the other important half is about how much equity an investor must own to achieve his investment objective effectively.

Once he resolves this query, he must know how much the next asset say fixed income on the debt category should have. The same question again comes how much of the real estate or the property and so on. These of all assets together and you have the commonly know asset allocation plan with you.

Why asset allocation?

When you diversify across assets you are able to give yourself a lot of leverage to counter the market uncertainties. Till the times an asset like stock market for instance are progressing you probably cannot appreciate the importance of asset allocation. In fact you may even feel that asset allocation is a hindrance of its having. It usually takes an adversity to fully appreciate that having more than one asset in your portfolio can be a big bonus.

Assets have varying cycles: these are ups and downs in the asset fortunes. Not all assets move in the same direction, the same time, in fact that is a rare phenomenon. This means that if stock markets are witnessing a prolonged rally, then it is unlikely that the other assets say gold or the property will also witness a sharp up-run at the same time. On the same lines, if stock markets are in the midst of a prolonged bear phase, other assets are unlikely to be in the same situation.

Bottom line is since you do not know which asset is going to be at which stage at what particular point of time; the best is to invest in more than one asset so as to improve your chance of achieving your long term goals with minimum turbulence.

An honest and competent financial planner is best equipped to recommend an asset allocation that correctly reflects your risk appetite and is geared to achieve your investment objective.

Also to note asset allocation is not a one time process rather it must proceed on an on-going basis. This is because with the exception of cash, all assets like your equities, your debt, your gold and property with the passage of time will shift from the original allocations. For instance, it is possible that after rally in the stock markets, your equity allocation is increased considerably, from what it was before rally however, your risk appetite is the same, this could reflect the reality you must not reach higher equity allocation by selling the excess equity and increasing the allocation to other assets say debt or gold. The objective is that over a period of time, you must be as close as your original asset allocation as possible which is defined to attain your goals keeping in mind your appetite towards risk.

Any financial plan that aims at realizing predetermined investment objective without diversifying across asset classes is supposed to fail, for sure. I am not talking theories over here, this is reality. Every time there is a rally in a particular market, investors float it ignoring the basic of financial planning.

A rally in technology stocks often mean investing in the technology companies only. Upturn in real estate means ignoring other assets against real estate and property. A surge in gold prices will mean you should keep on buying gold only. All this lead towards irrational investment decision. Other factors are greed and media hype. The intermediately and media make the money from all the hype but the retail investor is sitting on a disaster that is failing to happen later. When the rally fizzles out which did in 2008 in equity and in 2012-2013 in real estate also, the retail investor is usually the biggest loser since he is the last to get out. This could have been averted very easily if he was diversified across assets with no single asset occupying a larger than necessary share in his investment plan.